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Portland General Electric Company (NYSE:POR)

Q2 2008 Earnings Call

August 7, 2008 5:00 pm ET

Executives

Bill Valach - Director IR

Peggy Fowler - CEO and President

Jim Piro - EVP Finance, CFO and Treasurer

Analysts

Maurice May - Power Insights

Michael Lapides - Goldman Sachs

Brian Russo - Ladenburg Thalmann

Steve Gambuzza - Longbow Capital

James Bellessa - D.A. Davidson & Company

Phyllis Gray - Dwight Asset Management

Operator

Good day everyone and welcome to the Portland General Electric second quarter 2008 earnings results conference call. Today is Thursday August 7th, 2008 and this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions) For opening remarks, I would now like to turn the conference call over to Portland General Electric's Director of Investor Relations, Mr. Bill Valach. Please go ahead sir.

Bill Valach

Thank you, [Jamara]. Good afternoon everyone. I am Bill Valach, Director of Investor Relations at Portland General Electric and we are very pleased that you are able to participate with us today. Before we begin our discussion this afternoon, I would like to make our customary statements regarding Portland General Electric's written and oral disclosures and commentary.

There will be statements in this call that are not based on historical facts and as such constitute forward-looking statements under current law. These statements are subject to factors that may cause actual results to differ materially from the forward-looking statements made today. For a description of some of the factors that may occur that could cause such differences, the company requests that you read our most recent Form 10-K and Form 10-Qs.

The Form 10-Q for the second quarter ending June 31, 2008 will be available tomorrow at portlandgeneral.com. The company undertakes no obligations to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise and this Safe Harbor statement should be incorporated as part of any transcript of this call.

Portland General Electric's second quarter 2008 earnings were released before the market opened today and the release is available at portlandgeneral.com. With this release, PGE announced earnings of $39 million or $0.63 per diluted share for the second quarter ending March 30, 2008 compared to $46 million or $0.73 per diluted share for the second quarter ending March 30, 2007.

With me today are Peggy Fowler, CEO and President and Jim Piro, Executive Vice President of Finance, CFO and Treasurer. Peggy will begin the call with an overview, Jim will then discuss in more detail our second quarter results and then we will open the call up to question.

So, with that, I would like to turn the call over to Peggy.

Peggy Fowler

Thank you, Bill. Good afternoon and thank you for joining us today. Welcome to Portland General Electric's 2008 second quarter earnings call. I enjoyed the opportunity to seeing many of you in June, when we were in New York on Boston for Analyst Day presentation. For those of you, who are able to join us thank you again for your timing interest in our company. During these meetings Jim Piro and I along with three other members of our executive team described how things look a bit different in Oregon and at Portland General.

We explained how these differences create opportunities for us to deliver long-term value to our shareholders and customers. During today's call, we will describe how our external operations during the first half of 2008 provided values. We will also update you on PGE's earning guidance, provide an overview of Oregon's economy and customer growth and review PGE's progress in investing to meet customer needs, which will drive earnings and growth for our shareholders.

Let's begin with earnings guidance. Today, we are increasing our full year 2008 earnings guidance by $0.10. The new guidance is now $1.85 to $1.95 per diluted share. The increase of space on continuing outstanding operations and gains from the sale of fuel from our Beaver plant, which we determined has surplus inventory that exceeded our needs for maintaining plant reliability. For the long-term, we continued to expect our annual earnings growth to remain at 6% to 8%, which will support continued growth in our dividends.

Now I would like to talk a little bit about the state of Oregon's economy. So, far this year Oregon's economy has performed better than the national average and this performance is expected to continue through the remainder of the year. During the first half of 2008, Oregon had payroll growth of 0.6% compared to 2007, while the nation had growth of only 0.3%. Like the nation, as a whole, Oregon has experienced a bit of a slowdown due in part to higher oil and natural gas prices and decline in the housing markets. However unlike the economic downturn from 2001 to 2003, the strengths of Oregon technology sector, export based industries and immigration are helping to provide support for Oregon's economies during this cycle.

In our operating area, we continue to see strong growth. Total customer served increased by 1.4% to approximately $813,000 as of June 30th, 2008 as compared to approximately $802,000 as of June 30th, 2007 and we project an approximate 2% increase in weather adjusted retail loads for 2008 with higher use for our industrial customers forecasted during the second half of the year. Some of our newest single business customers are solar manufacturing companies. In June, Intel announced that it is entering the Green Energy arena worth of $50 million investment in a new company called SpectraWatt Incorporated a start up solar cell manufacturer that will be located in our operating area.

SpectraWatt and other companies such as SolarWorld, Solaicx and XsunX, which have also announced facilities in our operating area, are creating an emerging solar cluster, which reinforces Oregon's reputation as the center for electric power reliability, sustainability and clean technologies.

PGE is becoming increasingly involved in the solar arena as well. This morning, [Oregon] Governor Ted Kulongoski too announced an exciting new partnership between PGE and Oregon Department of Transportation. Together, we are developing the nation's first highway solar project that will like a major freeway interchange located just outside of Portland. As these types of innovative projects combined with our commitment to operational excellence and customer service that drives PGE's customer satisfaction. We are very proud of the high marks, we have earned among our customers compared to other utilities across the nation.

J.D. Power and Associates just released the 2008 Residential Customer Satisfaction Study, which shows we are doing an excellent job of meeting customer needs. Here are just the few highlights. PGE ranked third out of 13 utilities in the region in overall customer satisfaction and out of 120 utilities survey, PGE ranked 12th nationally in overall customer satisfaction and 7th for power quality and reliability.

PGE also uses independent research firm to conduct surveys among all customer classes throughout the year. Results from these surveys demonstrate ongoing positive ratings for our customers as well. Overall satisfaction remains in the top quartile for residential and key customers and in the top decile for general business customers. The price of electricity is an important aspect of customer satisfaction. That's why we take any request for price increase very curiously. Jim will go in to detail about our 2009 general rate case in a few minutes. Before he does that I want to emphasize our company's commitment to cost control.

We know the current state of the economy and rising costs are major concerns for our customers and continuing to provide reliable and reasonably priced electricity as a priority for us. At PGE, we work hard to make our business as efficient and cost effective as possible. We are also maintaining a high level of system reliability. With rising energy cost its important that more important than ever for us to listen to our customers and help them to plan and manage their costs and become more energy efficient.

Now, I would like to provide you an update on a few key items related to PGE's operational excellence. In the second quarter, our diverse generation portfolio performed well. The availability of our plants during the first six months of the year including thermal, wind and hydro was approximately 85% with thermal at 78%, wind at 92% and PGE owned hydro close to a 100%. We have seen an increase in energy from hydro resources during the second quarter due to a delayed snowmelt. Current forecast indicated above normal hydro conditions for 2008 including a 101% on the Deschutes River, 163% on the Clackamas River and 102% on the Columbia River at Grand Coulee.

On the renewable generation front, we are extremely pleased with the progress we are making with Phases II and III of our Biglow Canyon Wind Farm. We have recently entered into a construction contract with D.H. Blattner & Sons. The same contractor we used for Phase I. Construction is underway on Phase II and we expected to be finished in late 2009. Phase III is expected to be completed in late 2010. We estimate the combined costs of both Phases II and III to be approximately $740 to $780 million including AFTC. All three phases of the project are expected to have a total capacity of almost 450 megawatt.

Through our Integrated Resource Planning progress that Oregon Public Utility Commission agreed that our need for additional renewable resources beyond Biglow Canyon Phases II and III is reasonable. And as a result in April, we issued a request for proposal seeking out to an additional 218 average megawatts of renewable resources. We received 38 responses to the RFP and we are in the process of reviewing submissions and selecting a shortlist competitor.

These renewable resources were part of our 2007 Integrated Resource Plan and as requested by PwC, we are currently preparing the 2009 Integrated Resource Plan, which will include additional longer-term analysis to address the resource decision beyond 2012. The potential effect of federal climate change policies, uncertainty around fuel prices and load projections along with future decisions on emission controls at the Boardman plant will be taken into consideration, as we drop this proposal. We expect that 2009 Integrated Resource Plan to further define PGE's energy and capacity needs and we'll submit our plan to the OPUC by October 2009.

The second quarter also brought positive progress with our advance metering infrastructure or smart meter project. On May 5th, 2008 the OPUC approved our smart meter project with the 0.8% average price increase effective June 1st, 2008 through December 31st, 2010. In January, we began systems testing and are in the process of installing 16,000 new smart meters for residential and commercial customers by year end.

By the end of 2010, we expect that the project will be completed with the total of approximately 850,000 meters installed. Using a two way communication technology, we'll have the ability to read electric meters remotely, which will provide operational freedom for PGE and more customized billing options for our customers. Down the road, we'll start evaluating additional programs that will allow customers to use energy more efficiently and in a way that benefits our capacity needs at the same time.

With that, I would like to turn the call over to Jim Piro, our Chief Financial Officer to discuss our financial results in more detail.

Jim Piro

Thank you, Peggy and good afternoon everyone. .PGE's net income for the second quarter 2008 was $39 million or $0.63 per diluted share compared to $46 million or $0.73 per diluted share for the second quarter of 2007. 2008 results reflect an increase in retail energy deliveries due to cooler weather and an increase in the number of customer served compared to the second quarter 2007. Also contributing to earnings was the addition of Biglow Canyon phase I into customers' prices. These positive results were offset by decreased fair market values on non-qualified benefit plan trust assets and higher operating expenses.

As we discussed, our first quarter earnings call PGE's 2008 hydro production was lower than normal due to colder temperatures and a resulting delay in snow melts, which had an impact of approximately $6 million after tax or $0.10 per share based on a comparison to our forecast of normal hydro condition. We have seen partial recovery of the $0.10 per share during the second quarter amounting to approximately $2 million after tax or $0.03 per share.

We expect to have above normal hydro production for the remainder of the year, resulting in above normal hydro production for the full year. Due to the improving hydro conditions, solid thermal operations and gains from the sale of oil inventory to the second quarter, PGE has experienced a reduction in its power cost as compared to the base line as filed in the Annual Update Tariff. As a result, we have triggered the power cost adjustment mechanism and have booked $7 million for our potential refund to customers. We will continue to update the power cost adjustment mechanism quarterly and we will make a final determination of any customer refund or collection with completion of an earnings test at year end. This is just one mechanism that enables PGE to provide value to both customers and shareholders.

Now I would like to update you on a few key items. We continue to work with the OPUC Staff and customer groups regarding our 2009 general rate case in order to achieve fair and reasonable results. In February, we filed our general rate case based on the 2009 forward test year. The filing proposed a revenue requirement increase of approximately $146 million or 8.9% average price increase. The new prices expected to go into effect in January 2009.

During this regulatory process PGE, OPUC Staff and interveners have reached settlement agreement on two major items, one for the cost of capital and the other for net variable power cost. First the agreement on the cost of capital stipulates that their will be no change to our current 10.1% return on common equity and capital structure of 50% debt and 50% equity. This stipulation results in approximate $30 million reduction to the proposed revenue requirement increase.

Second, the agreement on net variable power cost stipulates to a number of modeling and other adjustments, which results in approximately $5 million downward adjustment to the forecast of 2009 net variable power cost. Including these two stipulations in the July 11th update to the forecast of 2009 net variable power cost, the current total revenue requirements increased for 2009 is approximately $229 million and consists of a $151 million for power cost and $78 million for all other cost.

This will now result in a proposed total average price increase of approximately 14%. However, we currently believe the overall price increase could be lower due to a recent decrease in the market prices for power and natural gas, which if sustained will be reflected in our September and final November updates to our 2009 forecast of Net Variable Power Cost. We continue to work with all parties on remaining non-power cost items and the next step in the procedural schedule is PGE's rebuttal testimony due to be filed on August 15th.

Now I will provide you an update on PGE's capital expenditures. For 2008, capital expenditures are expected to be approximately $415 million including $229 million for ongoing production, transmission and distribution, $98 million for BigLow Canyon Phases II and III, $62 million for ongoing hydro relicensing projects, $23 million for smart meters and $3 million for Boardman emission controls. Capital expenditures are $20 million higher than our prior forecast for 2008 primarily due to a change in the timing of expenditures for Phases II and III of the BigLow Canyon Wind Farm.

To finance PGE's capital expenditures and maintain a 50/50 capital structure, we plan to issue approximately $275 million of long-term debt and $200 million of equity in either late 2008 or during 2009. We continue to maintain stable operating cash flow and adequate liquidity to fund on going operations to both our $400 million multiyear revolver and access to the commercial paper market. At the end of the second quarter, PGE had approximately $363 million of available liquidity under the revolver. In June 2008, PGE extended the maturity on $390 million of the revolver to July 2013 with the remaining $10 million maturing in July 2012.

We continue to maintain investment grade bond ratings. Our senior secured ratings are Baa1 at Moody's and A at Standard & Poor's. The focus of our financial objective continues to be on our core utility business. This includes efficiently accessing the capital markets to support investment in new and existing assets, achieve fair and reasonable regulatory outcomes, maintain investment grade credit ratings and earn a fair return on our invested capital.

Now, I would like to turn it back over to Peggy.

Peggy Fowler

Thanks, Jim. Our second quarter results show we are making solid progress on several key projects and keeping our customers satisfied. We are reaching settlement on critical areas of our 2009 general rate case with regulators and customer groups and we have received regulatory approval for our smart meter projects and have started in selling the meters. Construction of Biglow Canyon Phase II has begun. We have also received good response to our RFP for additional renewable resources and are in the process of carefully reviewing our best available options. Our solid thermal operations and improving hydro conditions allow PGE to provide value to both our customers and shareholders. Finally, we will continue to invest in our business to deliver value to our shareholders and our growing customer base.

Jamara, now we would like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will come from the line of Maurice May with Power Insights.

Maurice May - Power Insights

Good afternoon folks. Congratulations on a good quarter.

Peggy Fowler

Thank you, Maury.

Jim Piro

Thanks, Maury.

Maurice May - Power Insights

First question has to do with the profit you book from the sale of fuels. Why are those profits flowing to shareholders and not to rate payers?

Peggy Fowler

Jim, I will let you talk about how the accounting works on that.

Jim Piro

Yes. We had a certain amount of your oil inventory at the end of the year and the decision was made based on new requirements to meet our restrictions that we could sell some of that oil. That is considered part of our PCAM and it goes to the PCAM mechanism. So, that would go through the mechanism and to the extent we are in the deadband that is 90% with customers and 10% with the shareholders, so that is the way the sharing mechanism is.

Maurice May - Power Insights

Okay. So, the $0.10 pickup is a combination of 10% to shareholder plus recovery of previously under recovered fuel?

Jim Piro

Yes. I think that plus the ongoing good operations remember the deadband has a $14 million deadband on the upside. So, essentially we will work through that deadband.

Maurice May - Power Insights

Okay.

Jim Piro

Now we are in a sharing mechanism and that is primarily due to good hydro conditions. The plants have been operating well and that adds to that the sale of the oil inventory.

Maurice May - Power Insights

Okay. So, you work on the positives. You can flow it through because you are in the positive side of the deadband.

Jim Piro

That is correct. Then that is also due to an earnings test as you recall that we would not start refunding the customers until we achieve a ROV of 11.1%, and we will look at that closely in the third and the fourth quarter, as we get the full year results.

Maurice May - Power Insights

Okay great. Second question has to do with the Trojan Remand is there any update their please?

Peggy Fowler

We are still working through the process on the Trojan Remand. You are probably aware of the schedule that is out there and we still are confident that the Commission wants to resolve it as quickly as possible. The utility reform project has recently requested oral arguments so it is possible that there could be a slight push out in the schedule after OPUC. I think it is important to remember that we still have not taken any reserve. We want to work through the final process and continue to attract what is going on here, but really not a significant change at this point.

Maurice May - Power Insights

Okay. The existing schedule calls for a decision sometime in early September I believe?

Peggy Fowler

Yes. Commission order by September 12th, I would not be surprised to see that push until the end of September. We are right now trying to decide what we want to say about oral arguments. I think in the name of wanting to have this result carefully and fully it is probably good for us to go ahead and allow that but ask that it would be scheduled quickly so that we can get it done in a reasonable timeframe.

Maurice May - Power Insights

Okay. Do you any estimate or what is your potential exposure might be?

Peggy Fowler

No, we do not. We still, like I said we have not taken any reserves. We do not think we have exposure here. And the Staff case has come in basically saying that if you are to really do this, it was in the $5 million range, but then Dan make out his numbers out there that are significantly larger than that.

Maurice May - Power Insights

Yes, okay. Well, thank you very much folks.

Peggy Fowler

You're welcome.

Jim Piro

Thanks, Maury.

Operator

Your next question will come from the line of Michael Lapides with Goldman Sachs.

Michael Lapides - Goldman Sachs

Two questions. One related to Trojans, I am following up on the last one and then going back to the renewable RFP. On Trojan, regardless of how the Commission orders, do you expect whoever "loses" to windup taking it back into the court system again.

Peggy Fowler

Yes, we expect that, but not necessarily whoever loses. If Dan loses, he will take it back to the court system, and he will continue to pursue this as he can. I think that we will make his case very hard, if we get a good and thorough order out of this. We will have some clarity around magnitude and what could be involved here.

Michael Lapides - Goldman Sachs

Is there any concern that he would try and take it in the federal versus state, I mean it does not seem like there is jurisdiction for federal but just wanted to check with you?

Peggy Fowler

I have never had any concern around that at all, no.

Michael Lapides - Goldman Sachs

Okay. Second question, on the renewable RFP, are there opportunities that could lead to transmission build-out by Portland General related to the renewable RFP?

Peggy Fowler

Yes, anytime that we look at any new generating resource, as part of that we look at the transmission that would be needed and we would include that as part of the project. Now the things I have to embed in, we have not looked at details but they need to include transmission into our system and so there might be some that would makes sense to have some transmission build-out. Again transmission for us for the most part is to serve our native load, and we want to do that to connect our resource. The other piece, we are looking at over time is the Southern Crossing Project, but that really is not part of that RFP at all and if associated with those resources.

Michael Lapides - Goldman Sachs

Got it, okay, thank you.

Peggy Fowler

You're welcome.

Operator

Your next question will come from the line of Brian Russo with Ladenburg Thalmann.

Brian Russo - Ladenburg Thalmann

Hi good afternoon

Jim Piro

Hey Brian

Peggy Fowler

Hi Brian.

Brian Russo - Ladenburg Thalmann

It looks like most of my questions have been asked and answered. I just want to be clear, the $0.10 increase in guidance assumes approximately $0.07 for the fuel oil gain?

Peggy Fowler

Jim is looking through the numbers here - -

Jim Piro

It was $7 million pretax, I think is the forecast amount.

Brian Russo - Ladenburg Thalmann

Okay, all right. So, I get back into the EPS. Also, it looks like your income tax rate was much lower in the second quarter; I am wondering what a good full years tax rate would be?

Jim Piro

When we look at our tax rate for the year, remember now we are qualified for production tax credit. So, that has really changed our tax position. So, taking advantage of those production tax credits with Biglow Canyon phase I will reduced our effective tax rate, and we are approximately to 30% range.

Brian Russo - Ladenburg Thalmann

Okay. So, for full year 2008 on average tax rate is 30%.

Jim Piro

Yes and that gets factored in the production tax credit, another credits that we have. Close to those related to wind.

Brian Russo - Ladenburg Thalmann

Okay. Do you have confidence that you can earn the allowed ROE or I know you got a forward looking test year that helps but historically have you been able to earn closer to the allowed ROE?

Peggy Fowler

We bringing our allowed ROE is very important to us. We work very hard to do that. So that is the key focus.

Brian Russo - Ladenburg Thalmann

What was your actual ROE in 2007? I know, there is some….

Peggy Fowler

Jim do you have the actual ROE?

Jim Piro

Again, you always have to adjust that. The regulatory filing we made was above the ROE primarily because of the good results on the power side. So, we do a normalized look from a regulatory perspective and we follow that with the Commission on an annual basis and we were above last year. On a total basis, I think last year we are probably above that primarily because we have booked the Boardman deferral that was granted during the year, which was the timing issue. So, you have to start normalizing the things out. Your answer on the oil just to clarify through the first six months, the oil sales were about $4 million after tax and for the year they forecasted to be about $7 million after tax.

Brian Russo - Ladenburg Thalmann

Okay. So, you are expecting an additional $3 million in the second half?

Jim Piro

That is correct, and that would put us back to our reliability level for purposes of storage at Beaver in terms of our comfort level, where we want to be for the reliability.

Brian Russo - Ladenburg Thalmann

Okay, and that is included in the full year increased guidance.

Peggy Fowler

Yes. The increased guidance includes the full year.

Brian Russo - Ladenburg Thalmann

Okay, great. Thank you.

Operator

Your next question will come from the line of Steve Gambuzza with Longbow Capital.

Steve Gambuzza - Longbow Capital

Good afternoon.

Peggy Fowler

Hi, Steve.

Steve Gambuzza - Longbow Capital

The rate increase that you file for which is in the current power cost forecast, is it the 14% on customer increase? I was wondering you mentioned by marking at the market on the current gas price strip there might be something less than that. I am wondering, if you would give us some order of magnitude for what the difference might be at the current price level more or perhaps just say what gas price strip will bill out?

Peggy Fowler

Sure. We are anticipating. We have run the numbers and as we currently look for where we currently are since that timeframe, we expect that the total increase would be around 11% well random again in September, and then again in November to see. Jim, do you want to---

Jim Piro

We run the numbers weekly. They move around just because of the forward strip. So, the way to get people triangulated on a number, but price will not decrease. However, I will tell you that we are closing a lot of our position as we try to closer to setting our final power cost until the volatility will start reducing, as we get through the next filing.

Steve Gambuzza - Longbow Capital

Okay. So, changing your position for 2009?

Jim Piro

Exactly 2009.

Steve Gambuzza - Longbow Capital

Okay. In terms of the impact of some of this one time items on the guidance relates to the fuel oil sale. It also looks like there was a negative charge for the impairment of pension related assets that somewhat offset the positive from the fuel oil sales, is that correct?

Peggy Fowler

Yes. Our pension plan is like everybody, who is investing these days are suffering a little bit not of the same magnitude. Jim, do you want to talk about the mix?

Jim Piro

Yes. The specific reduction we had it was called our non-qualified plans. Our pension plan goes through FAS 87 expense. We do that every year on an annual basis, but the non-qualified plans since they are not in the list of plans. We have few mark-to-market accounting there. We had a decline in the value of those assets. I think, if you look on the balance sheet you will see about $60 million of those assets and those are diversified portfolio and with the decline in the market those did go down. I think we did disclose in our earnings release the exact numbers related to that compared to last year and overall for the years. So…

Steve Gambuzza - Longbow Capital

But that includes….

Jim Piro

It can go up and down and those are really below the line, those are non-utility results and the above the line obviously was the improvement in power cost.

Steve Gambuzza - Longbow Capital

Is that decline is part of your guidance, is that correct?

Peggy Fowler

Yes.

Jim Piro

Yes.

Steve Gambuzza - Longbow Capital

So, I am thinking about it will essentially offset a good portion of the gain on the sales of oil inventory in terms of the improvement in guidance. Is that a fair way to think about it?

Jim Piro

Not precisely, because of the PCAM.

Steve Gambuzza - Longbow Capital

Okay.

Jim Piro

The PCAM takes some of that, that the sale from the oil inventory away.

Steve Gambuzza - Longbow Capital

Meaning that there was even less of a benefit from the sales of oil inventory?

Jim Piro

Right. So, then you have to look at the overall improvement relative to power cost and operations basically.

Steve Gambuzza - Longbow Capital

Great, thanks very much.

Operator

(Operator Instructions) Your next question will come from the line of James Bellessa with D.A. Davidson & Company.

James Bellessa - D.A. Davidson & Company

Good afternoon.

Peggy Fowler

Hi, Jim.

Jim Piro

Hi, Jim.

James Bellessa - D.A. Davidson & Company

You indicated that you had this late snowmelt and it cost you $0.06 of share but if I heard you correctly, you made of $0.03 of that in July?

Jim Piro

In the second quarter.

James Bellessa - D.A. Davidson & Company

In the second quarter you made it that.

Jim Piro

$0.03

James Bellessa - D.A. Davidson & Company

The late snowmelt was only a net $0.03 cost.

Jim Piro

It was $0.03 better then normal if you will. So, that is eases into the prior three months that were below normal. We expect it to continue to be above normal for the rest of the year with the overall results being above normal. We did not provide any specific guidance for the total amount of hydro for the year in terms of dollar, in cents per share.

James Bellessa - D.A. Davidson & Company

Then if I heard correctly, you have more oil sales to come during the rest of this year?

Peggy Fowler

Yes, that is correct, but we have included that in the earnings guidance.

James Bellessa - D.A. Davidson & Company

What is the amount that you are going to add to sales?

Peggy Fowler

In July and August we have approximately 40,000 barrels for the two months for July and August sales. So they are last sales of oil inventory and cyclical pretax income in the $2.5 to $4.5 million range, but that included in the guidance.

James Bellessa - D.A. Davidson & Company

You have already got the $0.7 from oil sales, here is another $0.3 is that what you are saying?

Jim Piro

We have to know because of the PCAM.

Peggy Fowler

PCAM goes on there and taxes all that.

James Bellessa - D.A. Davidson & Company

Great, okay. You gave some guidance us to your customers take in the second half and their demand for energy, can you repeat that please?

Peggy Fowler

I am not sure. Jim, you are cutting out the customers take for energy or what is the usage, what we are expecting?

James Bellessa - D.A. Davidson & Company

Did not you tell us what your customers may have for the demand for electricity in the second half?

Peggy Fowler

We continue to see about, not in the second half, but I think we continue to see about a 2% increase mostly on the industrial side.

James Bellessa - D.A. Davidson & Company

The industrial is this, you talked about some of this solar development companies.

Peggy Fowler

Yes, they are included in some of that other increased used.

James Bellessa - D.A. Davidson & Company

You are not seeing any downturns by any other industrial users?

Peggy Fowler

As we look at our loads and understand what our customers are doing, this is our best assessment of what is going on out there. Right now when some of our larger industrials have choice to go to the market, so we may not be serving some of those. We do not have any indications of anything like that at all.

James Bellessa - D.A. Davidson & Company

Thank you very much.

Jim Piro

Thanks Jim.

Operator

Your next question will come from the line of Phyllis Gray with Dwight Asset Management.

Phyllis Gray - Dwight Asset Management

Good afternoon. I have a question about your smart meter program?

Peggy Fowler

Yes.

Phyllis Gray - Dwight Asset Management

Could you remind me what the total cost of the program implementation is?

Jim Piro

Somewhere between $130 million and $135 million for the full process.

Peggy Fowler

Yes. For the deployment of the basic systems that does not get us to the point of actually being able to do capacity or any of that type of work with the meter. We have to get another $20 million to $30 million to get there.

Jim Piro

This year we expect to spend about $23 million on what is called the system acceptance test. We spend about six months going through that test to make sure that metes work, the communications work and the back office technology all works, if everything goes well we would start deployments starting January of next year. We will not start deployment until we complete that SAT test and are comfortable that these things all work as they need to. We will then deploy those over two years, hopefully completing by 2010.

Phyllis Gray - Dwight Asset Management

Okay. Is the testing just around the automated meter reading, the remote meter reading?

Peggy Fowler

No. It is really around software systems that tally you everything back into our customer system.

Jim Piro

Right we need to make sure it links all the way back to the billing system, so we make sure we get bills out. So right from the meter all the way back to the billing system, we have to test through.

Peggy Fowler

We are very comfortable with the technology we have selected; it is really the software that we have to test.

Phyllis Gray - Dwight Asset Management

Will you be implementing any rate design changes along with the installation of the meters?

Peggy Fowler

We received approval from the Power Commission for the capital cost, but this is just a basic roll out of our native meters, rate design and all of that would come more around beyond 2010, when we actually have the meters in place and figured out if on and off keep pricing or capacity or those types of things make any type of sense. We would also have to make some additional capital investments in order to be able to do that.

Jim Piro

As far as the program we committed to do is a pilot program as Peggy mentioned, and we will charge that after the systems out there and then we will take that all back to the PUC to make sure they are comfortable with us moving forward with that next phase of the project.

Phyllis Gray - Dwight Asset Management

Thanks very much

Peggy Fowler

Okay. You're welcome.

Operator

At this time there are no further questions. I would now like to turn the call over to management for closing remarks.

Peggy Fowler

We appreciate your interest in Portland General Electric and we invite you to join us in a few months when we report our third quarter 2008 results. If you have any additional questions, please contact Bill Valach who will be available after this call, thank you again for joining us today.

Operator

Ladies and gentlemen, thank you for participating in today's Portland General Electric second quarter 2008 earnings result conference call. This call will be available for replay beginning at 8 pm Eastern Time today, through 11.59 pm Eastern Time on August 14th, 2008, the conference ID number for the replay is 546-979-49, again the conference ID number is 546-979-49. The number to dial for the replay is 1800-642-1687 or 1706-645-9291. This concludes today’s conference you may disconnect at this time.

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